Credit Card Debt: How to Avoid Getting Carried Away
For some people, that first credit card feels like financial freedom. Suddenly, you aren't restricted to the money that's actually in your bank account. Instead, you can spend money that you haven't actually earned yet and just pay it back later. It sounds like a golden opportunity, right? Unfortunately, for that reason many people abuse their credit cards, creating an endless cycle of debt and barely treading water as they attempt to manage their finances.
How Has Your Credit Card Changed?
Do you still have your first credit card? If you do, chances are it's changed over the years. Your interest rate may be significantly higher. If overall, you have a fairly good credit rating, your credit limits might have grown right along with it. Not only that, as you've gotten older, you may have taken on more credit cards. You may have specific store cards and now have more than one credit card in your wallet. You may even have practiced the art of the balance transfer; putting the balance from one credit card on another one to avoid having to actually pay the minimum for the month. Before you know it, your credit card debt is spiraling out of control and you may not be sure how to pull it back.
How Minimum Payments May Impact Your Finances
Many people pay only the minimum balance on their credit cards each month - and some of them are continuing to rack up significant credit card debt while they do it. Paying the minimum payment by the due date keeps you in good standing with your credit card company, but it won't help you pay down your debt effectively.
Take a look at a card with $5,000 in debt - just a little over the national average of $4,100 per individual. At 19% interest rate and 2% minimum payment, it could take you more than 8 years to pay off that debt - and you'll be paying even more in credit card interest charges over those years.
Increase that same card to $10,000 in debt with its 19% interest rate and 2% minimum payment, and you'll find yourself making payments on it for 8 years as well and with more than $9,000 in interest fees. Imagine the difference if you were able to pay off the debt quickly and effectively. Not only would it put you in a better financial position in the future, since you wouldn't have credit card debt to worry about, it would prevent you from spending a fortune in interest fees.
Ontario Law and Interest Fees
In Ontario, if you choose to take out a payday loan, you may find up to $15 added every two weeks for every $100 borrowed. This is the maximum amount allowed by Ontario law. Luckily, your credit cards don't accumulate interest that quickly. Credit cards however, can include interest rates between 10% and 29.99%. It doesn’t take long for interest to add up, and in the meantime if you're accumulating more debt, it can send you on a downward spiral that’s difficult to recover from.
Using Your Credit Card Responsibly
Credit cards can be a way to build your credit. However, they should only be used if you can pay them off at the time they are due. Having a credit card won't necessarily destroy your financial planning; in fact, using one responsibly, can help increase your credit and help you attain better interest rates if you need to buy a home or car.
If you find yourself with credit card debt:
Pay off your debt as soon as possible. Go above the minimum with each payment. The sooner you pay off your debt, the sooner you will be able to stop worrying about it - and ultimately, that will mean more money in your pocket.
Use your credit card only for things you can actually afford. If you are using your credit card to build your credit score, consider using it to pay for regular expenses: your groceries or gas, for example. Then, immediately turn around and pay it off - or subtract the money from your bank record and pay it off at the end of the month. You won't incur interest charges as long as you pay off the credit card bill in a timely manner, and you'll be able to build your credit rating at the same time.
Build up an emergency fund so that you don’t have to use your credit card when emergencies happen. It's also important to know what qualifies as an emergency. Unexpected car repairs, for example, probably count as an emergency, especially if you rely on your vehicle to get to work or school and don't have the option of public transportation. A fancy dress for a party or a new video game release, on the other hand, definitely don't count as an emergency. Find ways to work out these expenses within your means or pass on them for now to help avoid excessive credit card debt and ending up in a situation where you need debt consolidation help.
Treading water can only last for so long. If you've barely paid the minimums on your credit cards for too long, or if you're struggling to keep up with your credit card payments, contact us today. As Licensed Insolvency Trustees, we’ll provide you with debt relief options, and work with you to develop a better budget and system for handling your money.